Question

Calculate and state the nature of activity under cash flow statement : Acquired Machinery for Rs 5,00,000 paying 50% by cheque and executing a bond for the balance payable :

• A. Inflow operating activity Rs 2,50,000
• B. Outflow operating activity Rs 5,00,000
• C. Inflow Investing activity Rs 5,00,000
• D. Outflow Investing activity Rs (2,50,000

Hint:

Understanding how a particular transaction influence the Cash flow activities chart is the key to answering any question.

Answer 1

The Correct Option is D

Understanding Cash Flow Activities:
Investing Activities relate to the purchase and sale of long-term assets and other investments.
Operating Activities relate to normal activities of a business.
Financing activities relate to funding from shareholders, debentures and loans.

Explanation: Here, 50% is paid by cheque for purchase of long term machinery. If full amount was paid by cheque, that will be Rs (5,00,000. However, the question states that bond has been executed, hence the total cash paid out is 5,00,000/2, i.e. 2,50,000 Rs and since the amount is being paid, the activity involves Cash outflow of (2,50,000Rs).
Reasons to Reject Other Options:
In any machinery related questions, the activity is an Investing Activity.
We are paying some amount, so the activity has to be outflow rather than inflow.